Business Directories

Saudi market 'could see $35bn foreign inflow'

Riyadh, July 24, 2014

Saudi capital market, the largest in the Middle East and North Africa (Mena) region, could draw up to $35 billion once it is opened to direct foreign investments, an analyst has said.

The long-awaited move, approved by the cabinet recently, will finally come to pass once the Capital Market Authority (CMA) formalises the timing and guidelines, with the issuance of the latter within 30 days, followed by a consultation period of 90 days and likely opening of the market during the first half of 2015.

"The opening of the Saudi stock market would be a major positive for the Mena region, with a total market capitalization of $1.2 trillion, where Saudi Arabia alone accounts for 45 per cent and where regional liquidity is around $4 billion of which Saudi Arabia represents 65 per cent. With over 160 listed securities the kingdom's stock market offers a diversified sector base," said Aleksandar Stojanovski, research analyst at Deutsche Bank.

Saudi equities are currently accessible only via synthetic products for foreign investors and estimates see less than 1 per cent foreign ownership of the market versus regional peers, where direct investments are available, with foreign ownership accounting for around 8 per cent.

"After an opening of the Saudi market and assuming foreign ownership reaches a similar level to the regional equity markets we could see up to around $35 billion of incremental foreign inflow versus the approximately $4 billion that foreigners have accumulated since 2009, when indirect ownership first became available," said Stojanovski.

Saudi Arabia is the most liquid market in the region, with a 6 months average daily trading volume (ADTV) of $2.5 billion, accounting for 65 per cent of the regional liquidity. Foreign investors – via indirect routes – currently trade only 1.1 per cent versus the regional average of 12.2 per cent.

Assuming the share of trades by foreign investors reach the regional average levels, there is potential for a marginal 11 per cent growth in Saudi Arabia’s liquidity, with ADTV levels reaching $2.7 billion. Yet, the $300 million of potential foreign incremental liquidity in Saudi Arabia could be a significant boost to the $145 million that foreigners currently trade in regional markets on a daily basis.

"With the direct trading restriction by foreign investors removed, we believe that the prospect of Saudi Arabia joining MSCI Emerging Markets becomes a reality, albeit unlikely before 2017. If promoted, we estimate the weight of Saudi Arabia in the EM index to be 1.9 per cent, using GCC country weights in the MSCI GCC index as a proxy. While the incremental fund inflows due to eventual MSCI EM promotion could reach up to $10 billion," Stojanovski concluded.

The combined weight of the Mena region could then rise to around 3 per cent, from its current 1 per cent, putting the region ahead of countries like Indonesia and Thailand. This year, UAE and Qatar joined the Emerging Markets index with weights of 0.58 per cent and 0.47 per cent, respectively. - TradeArabia News Service